Archive for the ‘Treasury’ tag
Bernanke Tries To Explain Why A Ponzi Scheme Is A Perfectly Acceptable System For Post Civil-War America, Fails
The following exchange between Ben Bernanke and Senator Kirk is a must watch for everyone who wonders how Ben Bernanke justifies the fact that America is now an open Ponzi scheme. Kirk’s question “in laymen’s terms this is one part of the government lending another part of the government money, which would not let to long term confidence once the American people understood the basics a little bit better” relates to the open monetization that the Fed does each and every day at least until the end of June. What Kirk did not ask is what happens when the American people realize just how truly preposterous the Ponzi is, and that all the interest “paid” by the Treasury to the Fed ends up being remitted as cash right back to the Treasury as revenue in essence incentivizing the Treasury to spend and borrow more in order to earn more! This is the most circular Weimarian nightmare scenario imaginable, and we can only hope that “the American people” understand this as soon as possible. As to Bernanke’s surprise that the US had a currency without any Federal debt to back it up (yes, it is possible to live within one’s means, even for a central bank) can we remind the Chairman that the gold on the Fed’s balance sheet, all eight tungsten thousand tons of it, is actually Marked to Market to almost $300 billion, and can by definition be used as a pledge to any liability, such as a currency or excess reserves. But oh yes, how could we forget, using just gold as an asset would never afford us the kind of adamantium price stability that we have seen in recent times. Plus how on earth could one infinitely dilute the dollar if the Fed’s balance sheet was limited by actual “assets” that do not require Hewlett Packard tech support every now and then.
This comes via Noam Scheiber at the New Republic (emphasis added):
Geithner hunched his shoulders, pressed his knees together, and lifted his heels up off the ground—an almost childlike expression of glee. “We’re going, like, existential,” he said. He told me he subscribes to the view that the world is on the cusp of a major “financial deepening”: As developing economies in the most populous countries mature, they will demand more and increasingly sophisticated financial services, the same way they demand cars for their growing middle classes and information technology for their corporations. If that’s true, then we should want U.S. banks positioned to compete abroad.
“I don’t have any enthusiasm for … trying to shrink the relative importance of the financial system in our economy as a test of reform, because we have to think about the fact that we operate in the broader world,” he said. “It’s the same thing for Microsoft or anything else. We want U.S. firms to benefit from that.” He continued: “Now financial firms are different because of the risk, but you can contain that through regulation.” This was the purpose of the recent financial reform, he said. In effect, Geithner was arguing that we should be as comfortable linking the fate of our economy to Wall Street as to automakers or Silicon Valley.
One can disagree with this substantively. Financial reform is a good start, with its stricter rules and new authority for regulators. But whether Wall Street can be made to behave like a normal industry rather than a source of economy-wide instability remains very much open to debate.
Still, the bigger question may be political. Is this a moment when the country demands a wholesale reimagination? A bet on Geithner going forward is a bet that the financial sector can regain its democratic legitimacy without being shrunk or radically restructured. Perhaps as much as the successes of the past two years, Geithner’s legacy will ultimately depend on how well Wall Street meets that test.
Read the whole thing. It’s a good piece for understanding Geithner’s thinking. He wants American banks to penetrate emerging markets and get even bigger. How this benefits the U.S. economy is unclear, however. It reminds me of the Slate piece from December 2009 when Geithner said the Obama Administration needed to override the popular sentiment against banks and bail them out in order to beat back the economic downturn.
I wrote a few months later:
this was a ruse to let the banks grow their way out of the crisis like Japan, albeit after they had already received huge capital injections from the private sector. That’s why big banks are earning gobs of money with interest rates at zero percent. If it weren’t for all the hidden losses, we’d be home free.
–Geithner: jusqu’ici tout va bien, Mar 2010
As for bank losses, Michael Pettis writes compellingly in the Chinese context that the real cost of non-performing loans is a socialization of them over the wider populace. Pettis writes:
Throughout modern history, and in nearly every economic system whether we are talking about China, the US, France, Brazil or any other country, there has really only been one meaningful way to resolve banking crises. Whenever non-performing loans or contingent liabilities surge to the point where the solvency of the banking system is threatened, the regulators ensure that wealth is transferred in sufficient amounts from the household sector to borrowers or banks to replenish bank capital and bring them back to solvency. The household sector, in other words, always pays to clean up the banks.
There are many ways to make them pay. In some cases, and certainly in the US before the 1930s, banks simply defaulted and their depositors absorbed the full loss. In that case it was the actual bank depositors, mainly households, who directly bore the full cost of the losses, in the form of reduced, or sometimes no, repayment of their deposits.
Largely because this kind of system creates incentives for bank runs, regulators developed alternative systems, by which governments guaranteed deposits and otherwise bailed out the banks, and paid for the bailout by raising taxes. In that case the household sector still paid for the losses, but they did so largely in the form of taxes, and the losses were spread out throughout the population.
Of course this way of bailing out the banks is politically unpopular and always leads to uncomfortable calls to punish the banks for their behavior. If the regulators are given a longer amount of time during which to clean up the banks, they can use other, less obvious and so less politically unpopular, ways to do the same thing, for example by managing interest rates. In the US and Europe it is fairly standard for the central bank to engineer a steep yield curve by forcing down short-term rates. Since banks borrow short from their depositors and lend long to their customers, the banks are effectively guaranteed a spread, at the expense of course of depositors. Over many years, the depositors end up recapitalizing the banks often without realizing it.
As I argued in the post on Bank Bailouts Explained, most of the bailouts will always be in the form of hidden subsidies and backdoor bailouts to minimise public anger. Even so, bailouts are always a gamble, a roll of the dice. If they underestimate needed capital and fail, then the government loses credibility and crisis ensues. This is what we have witnessed in Europe.
I should also point out that bailouts are seductive to policy makers because they can work even if the underlying economic fundamentals are suspect. If policy makers are able to kick the can far enough down the road and put enough time between the bailout and its inevitable consequences, they may escape blame for the inevitable crisis. The Savings and Loan crisis is a perfect example of this kind of thinking.
As for the most recent U.S. bailouts, I wrote last August On How Tim Geithner and I agree on public policy to demonstrate how all of the government programs are designed to recapitalise the banks. The key differences between Geithner and me are that I don’t believe the ends justify the means and I don’t believe we had a liquidity crisis; I believe we are in a solvency crisis which is still on-going. I would argue that crisis will return to the U.S. as well when the next downturn hits because of debt in the state, local and household levels as well as hidden losses in the financial sector. But that is a ways off yet. For now, the narrative that has gained momentum is one of stock market boom and sustainable recovery. If this narrative holds through 2012, Barack Obama will benefit.
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Geithner: Don’t shrink financial services!
by Jim Willie CB
With the advent, then the continuation of the Quantitative Easing exercise in hyper-inflation and capital destruction, the US Federal Reserve has perhaps taken its deeply damaged reputation as a central banker and decimated it into shreds. They have lost the respect of the world, more so outside the nation’s borders than inside. The financial sector and politicians seem unable to stop showing deep reverence for the post, even licking the Chairman’s boots whenever he appears before the USCongress. Recent hints of contempt in WashingtonDC are encouraging. He has not made a single correct forecast on major items. The USFed in short has lost control. See the rising bond yields, which torpedo the housing ship, badly listing as a derelict vessel. The USFed seems thoroughly content to rescue the big US banks, whose wretched condition cannot possibly be rectified, even if such a rescue results in global price inflation and revolts. The decision made after recognition that a recent QE chapter has failed is clearly to repeat it. When QE2 is exhausted or deemed a failure, expect QE3 at the doorstep. This behavior exhibits insanity. The February package of Hat Trick Letter reports includes a special report entitled “USFed as Agent of Destruction” that elaborates on the deep damage.
The USFed balance sheet reads like a Fannie Mae lookalike, with perhaps $1 trillion in negative value, if priced to market. No wonder they altered their rules for a major dump on the USDept Treasury. The next chapter should see a default in USGovt debt, as it spirals out of control, supported mainly by the monetization engines, the stuff of hyper-inflation. Meanwhile, back at the inflation farm, a widening array of economic mythology has sprung up, replete with nonsense and deep deceptions like shallow walls to defend the monetary press. The new myths extend from the standard Second Half Recovery dupe, the Jobless Recovery insult, the Green Shoots absurdity, and the Exit Strategy refrain that ushered in QE2. The inflation engineers must defend their craft, which has destroyed the USEconomy and rendered its banking system insolvent, as well as households. By the way, Ben aint no Atlas, holding up the world. He aint no Poseidon, controlling the oceans and all their liquidity. He sure aint pretty like Aprhodite neither, even though his bust might serve as a fine pin cushion. Hey! Don’t mention pins when standing near the USTreasury Bond bubble!
CLIMAX GRAND DECEPTION
The Hat Trick Letter has warned fully and repeatedly. The price inflation that has begun to show itself in clear terms will be passed off with pure economic deception, and extreme statistical fraud. The effect of higher prices will be called economic growth. The price inflation within the adjustment process with full motive will grossly under-estimate the actual rising price rate. Therefore, the adjustment off the nominal economic activity will be grossly inadequate. The 10% to 12% price inflation will be called 3% to 4%, and thus a 6% to 9% error in the Gross Domestic Product will be made. The consequence will be that a powerful recessionary surge downward will be called a positive 4% to 5% GDP growth. Credit goes to the stat rats who betray my field of expertise. The deception will calm public fears on the highly destructive effects of Quantitative Easing #2 and its price inflation side effects. Actually it is more like direct effects. No longer are the QE1 effects isolated to excess bank reserves held by the USFed. They were not excess anyway, since US banks simply held their loan loss reserves at the USFed. The main point is that price inflation will rise sharply, called economic growth, a process already begun. The USGovt and Wall Street handlers will ignore it, under-state it, and herald the return of growth as success of policy. The reality will be less growth, in a deeper decline into recession. It has been my contention for the entire seven years of the Hat Trick Letter that the topic of inflation has been the most egregiously misunderstood and most common used deception device used against the American people, as the USEconomy has deteriorated in grotesque fashion for 20 to 30 years. They have been told to hedge against that inflation by home ownership, which has backfired in a national catastrophe. The underlying cause of the deterioration is massive monetary inflation and price inflation, manifested structurally as an over-priced US labor market that has sent jobs to Asia since the first migration phase to the Pacific Rim in the 1980 decade. The semanal event was the Vietnam War, which urged the broken Bretton Woods accord.
SCATTERED SUPPORTING DECEPTIONS
The justifications, explanations, and clever deceptions have been and will continue to be widespread. They are many, like singers in a chorus, each with voices like Sirens leading men and their ships to the rocks and a watery grave. Destruction awaits those attracted by their serene tones. My ear is tuned to detect them and to record their many deceptions. Let’s touch on the wrong messages made on the US Public Address systems one at a time and dismiss them. They are trumpeted by the USGovt, by the Wall Street bank staffers, by the USFed Chairman and most Board members, by the US Financial press, by the market mavens, and by numerous others, all of whom did not foresee the wreckage and charred ruins like the burning of Troy. To be sure, the principal player was Alan Greenspan, whose charisma and eloquence made him the Helen of Troy for our modern day. Both his visage and utterances more resembled Mr Magoo.
- A) Rising prices are proof that the USEconomy can handle the higher costs. Not true! They are an indirect effect of massive monetary inflation, as surplus loose money sloshes until it makes higher priced items. A direct effect comes from a falling USDollar in whose terms commodities are priced.
- B) Rising commodity and material costs mean more profits all around. Not true! The exact opposite is the case, since profit margins are being squeezed. Businesses are making this statement openly.
- C) Rising prices mean the USGovt and USFed stimulus applied is finally working, as the system is coming alive. Not true! It signals the arrival of the nightmare, in the form of price inflation that the banking leaders said would not arrive. They boasted a year ago that the monetary inflation would not have a spillover effect. That spillover effect is precisely broadly rising prices, most evident in food & energy. Witness the spillover.
- D) Rising prices mean final demand has arrived, which is pushing up the prices. Not true! Final demand remains weak. Businesses do not anticipate a big rush of new demand, as their business investment is modest to non-existent. Consumers are strapped with weak income and no more home equity to raid.
- E) The USEconomy is least vulnerable to price inflation effects, since strongest and most resilient. Not true! The chief export in recent years from the United States had been mortgage bond fraud, along with the usual fare of USTreasury Bond empty paper. The chief export in the current period is commodity price inflation. The USEconomy remains a major importer, and thus will import the price inflation, a process already begun with both commodities and finished products. The US is the originator of massive monetary inflation. Since its economy is deteriorating and stifled, the resilience is born of weakness. Its back door will usher in that price inflation.
- F) The housing decline has kept prices in check from powerful deflation effects. Not true! The housing decline has guaranteed that the rising cost structure cannot be handled by the entire system. With the resumption in housing price decline, the insolvent banks will grow deeper in insolvency, while the households will fall more broadly into insolvency. Demand will not meet the higher prices required by corporations to even remain in business. Watch more job cuts and business shutdowns, since they must but cannot pass along the higher costs to customers.
- G) Higher prices in the stock market is prologue and harbinger for the growth of the USEconomy and corporate profits. Not true! The massive monetary inflation has spewed new phony money into the system. It leaks through an array of sieves. It finds paths of least resistance. Almost no resistance exists toward the stock market, especially with the Working Group for Financial Markets openly pushing up stocks, no longer in hidden fashion. The USDept Treasury finally admitted as much.
- H) Being a food producer, the USEconomy does not see rising food prices. Not true! For five years, the USEconomy has turned into a net importer of food products, although only slightly. The farm sector has seen their costs from diesel and other energy sources rise uniformly. The farm end product prices (like corn, wheat, soybean, cotton) are controlled on the commodity exchanges, not by farmers. So higher product and costs mean much higher prices at the US dinner tables.
- I) Rising producer costs is obvious. The miracle of not ending up in final product prices results in success of the system. Not true! If final products cannot have higher costs passed on, that means the businesses suffer important profit margin squeeze. In parallel, the lack of job or income growth means that households suffer important squeeze also on discretionary spending. The squeeze is systemic, not a success, resulting in lower demand and business layout cutbacks.
- J) Jobs will come eventually. Not true! This propaganda mantra is losing its mojo totally. Be prepared for a brief rejoice followed by the horrors of recognition that the USEconomy is suffering from broadbased price inflation and continued powerful deterioration. Monetary inflation destroys capital, a concept our clueless cast of economists cannot seem to conceive. In response to failure from monetary inflation, they order more in higher volumes. Prepare for QE3.
MORE SUBTLE CON GAMES
Homes turned out to be leveraged financial assets after all. Notice that the housing sector is not rising in price, as almost every commodity in the universe is rising rapidly, from rice crude oil to gold to cotton. Actually gold is not a commodity, but rather MONEY, being pursued as the global monetary system fractures and crumbles. Some Jackass warnings went back to 2006, calling the home nothing but a leveraged futures contract that had no callable feature for banks, but offered renewable reloads known as refinances. Along with a drawdown in account balance (home equity) came a foreclosure notice to millions of unwary investors. So much for the American Ownership Society! It was more like a siren call to the marginal buyers and minorities to lose all their life savings. The great majority of victims never read the great warning by Thomas Jeffersona about banks.
The clueless cast of US economists have lost their way so badly that they no longer comprehend legitimate income. They insist on USGovt programs to put more cash in people’s hands, from tax credits, jobless benefit extensions, home equity loan interest deductions, anything to put green in grubby hands. Talk of helicopter cash drops never materialized. The economist and bank leaders never seem concerned about the origin of money put in hands. They seem ignorant that credit extension and monetary inflation are almost always the source. They US economists ARE totally ignorant of the founding principles of capitalism, led by a mindless stream of expectation indexes. They fund elite bankers, redeem fraud-ridden bonds, create liquidity facilities to grease the debt system, erect channels for corporate paper, bail out dead corporations, feed the Working Group for Financial Markets in their stock market support, reload JPMorgan after the Lehman killjob for more commodity market price suppression, and much more. All these devious endeavors are funded by funny money or tainted money. Nowhere is open debate about a grand revival of US industry, a return of factories to US shores, a reversal of the PacRim outsourcing that reached a climax with the Chinese low-cost solution, followed by the current national insolvency. The nation has lost its way on basic capitalism, whose mantle China has picked up from the ground. Their many factories produce not only shiny useful products, but legitimate income. The clueless cast of US economists would do well to read basic textbooks on capitalism, capital formation, and the other cycle. It starts with business investment, then hiring, then value added, then worker income, then consumer spending. The United States must shed its devotion to asset bubbles and the Virtuous Cycle espoused by the USFed, which ends in systemic ruin, a ruin they cannot even recognize.
The recent history of enforcement against insider trading and excess speculation is criminal. Its pursuit of insider trading reads like a cheap spy novel. Right after the Lehman failure came attacks by Wall Street firms against their own hedge fund clients. Their trading investment positions were open to see. Wall Street banks cut the credit lines on hedge funds with prominent long positions in assorted commodities, including crude oil, gold, and silver. The attack was complete and vicious, leading to widespread liquidations. Many commodity prices fell hard. Obviously, Wall Street firms gobbled up the positions forced into liquidation on margin calls. The attack was followed by a ban on shorting the big US bank stocks. An exception was granted for Goldman Sachs, since they were busy doing God’s work. My guess is their god is money, and their lord breathes fire not love. The last few months have seen a sequence of arrests and prosecutions against insider trading, except that no Wall Street firm is implicated. Those conducting the investigations are of Wall Street pedigree, to be sure. In my view, moves against insider trading are disguised attacks against Wall Street competitors and opponents to the heavy handed naked shorting of important commodities led by the titans in South Manhattan.
Not a single effective prosecution took place after the May 2010 flash trading controversy, despite ample evidence that the malfeasance went far beyond insider trading. The illicit practice involved raids of the trading exchanges, deep looks at the order stacks, and front running of placed positions. The SEC and CFTC investigators should take a closer look at JPMorgan and Goldman Sachs orders placed in front of the actions taken by the Working Group for Financial Markets, aka the Plunge Protection Team. Furthermore, investigators should take a closer look at the common Wall Street practice of naked shorting of USTreasury Bonds. The evidence lies in the nearly $1 trillion in Failures to Deliver in the bonds. The inventive Wall Street firms found a way to produce instant liquidity from which they fund a large portion of their business operations, like meeting payroll and covering overhead costs.
A high paradox is kept a dirty secret by the USGovt and USFed. Low interest rates hurt savers, to be sure. However, the low prevailing interest rates actually slow down the USEconomy, not stimulate it. The total typical income from savers through bank CDs and bond fund income is in the neighborhood of $850 billion annually, in usual times with normalized bond yields. Compare that figure to the estimated $620 billion paid in interest for consumer loans, student loans, and revolving credit also in usual times. Higher bond yields put more legitimate income in the hands of savers, which more than compensate for the higher interest payments made. This grand deception must be kept quiet. The Wall Street fraud kings want that 0% rate, since it fuels their USTreasury carry trade. Free money can redeem their disastrous errors that tarnish balance sheets. It produces income without work, the great advantage of the elite.
SILVER BREAKS LOOSE OF GOLDEN LINK
Numerous are the important events taking place behind the curtains, behind the closed doors, the stratospheric ploys, under the cover of intrigue. They are reviewed in the Hat Trick Letter issues with analysis. China is gobbling up COMEX gold & silver, draining the London supply chain. The widely done but hardly publicized practice of settling COMEX precious metals contracts in cash with a 20% bonus has caught the eye of many. So gold & silver contracts contain little metal anymore, mainly paper. The recent tactic of building Dollar Swap Windows to gobble up Southern Europe sovereign debt at discount by the Chinese was outlined in the last article. They will likely convert much of those ruined bonds to gold bullion, with the aid of the IMF harlot. A global shortage of silver has grown acute. Several nations have announced skyrocketing silver coin demand, and outright shortages at the official mints. The latest tactic reported by intrepid analysts is that China has been gobbling up SPDR shares from the GLD gold exchange traded fund. They intend to convert GLD shares directly to gold, according to the London Deep Throat broker. Massive deliveries of gold bullion from this SPDR, managed by HSBC, have been reported in recent weeks. Gold bullion is exiting the fund inventory vaults in high volume, an order of magnitude greater than only two to four months ago. Apparently, the Chinese have noticed a faster method to acquire vaulted gold than the COMEX. Central banks in the Eastern world are loading up with gold bullion, not reporting all their accumulation, as they prepare and executive the Paradigm Shift. Power will move eastward. An excellent source informs me that China is accumulating gold at least 5x faster than the official figures indicate, maybe up to 10x faster. Russia posts some official numbers, more as chicken bones tossed before the feet of conmen. These topics are analyzed in the private newsletter Hat Trick Letter reports.
While the silver price leaps toward its high at $31/oz with reflex ease, the gold price struggles. My long held belief has been that on the Supply side argument, silver beats gold, and on the Demand side argument, silver beats gold. My forecast has been and will continue to be that the gains in Silver price will be around triple to the gains in the Gold price, due to tremendous shortages and colossal demand. So far, so good since last summer. It is my firm contention that China has been very busy buying silver. They probably are motivated by yet another USGovt betrayal. The Most Favored Nation status granted to China in 1999 apparently had at least two possible important components. In return for diverse industrial buildup, direct foreign investment, and shared technology, China appeared to have promised years of deep USTreasury Bond support. The side deal demanded by Wall Street appears to have been a large lease of Gold & Silver bullion left over from the Mso Tse Tung era. Recent demand for its return by the USGovt to China, as part of the lease contract, appears to contain a betrayal. Wall Street sold the leased hoard into the precious metal market, so it appears. To those who dispute the allegations, take note of the track record of profound fraud by the Wall Street banksters. Sale of the Chinese gold & silver came during and after sale of Fort Knox, and sale of the European swaps as well.
The Silver price has advanced handsomely since July 2010. Its gains have outdistanced those fo Gold. In the last two weeks, the rebound for Silver has embarrassed that of Gold. Thanks to Adrian Douglas for the fine chart, not showing the dimension of time but instead the paired prices of Gold & Silver. The chart exhibits clearly the falling Gold/Silver ratio. He wrote, “This update of my previous work adds more fuel to the fire that the dynamics of the silver market have dramatically changed. Because silver has been suppressed for so long we do not know what its free market price should be, but we are going to find out soon. I strongly suspect it will be many multiples of the current price.” Here, here!! Bring it on!!
February 10, 2011
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Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 25 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at www.GoldenJackass.com. For personal questions about subscriptions, contact him at JimWillieCB@aol.com
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Use the above link to subscribe to the paid research reports, which include coverage of critically important factors at work during the ongoing panicky attempt to sustain an unsustainable system burdened by numerous imbalances aggravated by global village forces. An historically unprecedented mess has been created by compromised central bankers and inept economic advisors, whose interference has irreversibly altered and damaged the world financial system, urgently pushed after the removed anchor of money to gold. Analysis features Gold, Crude Oil, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and US Federal Reserve monetary policy.